Daily Briefing

Next Week is Big for FX: Dollar, Euro, Pound in Focus Ahead of Fed, ECB, BoE

Price action and Macro.

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Talking Points:

- This morning’s Non-Farm Payrolls showed a +228k print versus the expectation of +195k.

- This brought a quick resistance-check in the U.S. Dollar after which bears began to show-up.

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This morning’s Non-Farm Payrolls print out of the United States came-in above expectations, with +228k jobs added to American payrolls in the month of November, and this is a decent beat of the expectation for +195k. This kept the unemployment rate steady at 4.1%, and Average hourly earnings were up .2% in the month versus a .3% expectation. This led to a quick check of the resistance zone that we’ve been following in USD that runs from 94.08-94.30, after which sellers started to take-over.

U.S. Dollar via ‘DXY’ Hourly: Rally into NFP, Tag of Resistance Zone and Turn-Lower

EUR/USD Hourly Chart

Chart prepared by James Stanley

2018 is far from over. With three weeks left on this year’s calendar, many market participants have already started to shift their attention into 2018. But – before we get there, we have a huge week of Central Bank activity when next week brings rate decisions out of the Fed, the ECB, the Bank of England and the Swiss National Bank. The only bank carrying any expectation for any actual moves is the Fed, as markets have kept a near 100% probability of a hike at next week’s meeting. There’s even a growing chorus of those expecting a 50 basis point hike at next week’s meeting, as CME FedWatch is showing a 9.2% probability of such a move.

The U.S. Dollar

The Greenback will likely stay near the center of the fray next week. This is not to say that themes in Europe, the U.K. or even Switzerland are not of importance; but the U.S. Dollar appears to be working on a bigger picture theme and next week’s FOMC meeting can provide some clarity. With next week’s rate hike likely baked-in to current price action, the focus will be on the Fed’s outlook for 2018. Thus far, the Fed has held with their expectation for three hikes in 2018. This puts the bank as somewhat of an outlier amongst large, developed economies; as Central Banks in Europe, the U.K. and Japan continue to embark on uber-dovish policy outlays.

But this divergence has mattered little so far in 2017, as the U.S. Dollar is down -9.5% from the high set on January 3rd, and this comes after a bearish move that had taken out as much as -12.3% of the U.S. Dollar’s value. This has left many traders and market participants puzzled: If the Fed is the only game in town for rate hikes, why isn’t the Dollar showing gains?

The answer to that question likely has some form of relationship with the breakaway strength seen in the Euro for much of this year, and this draws all the way back to the U.S. Dollar’s performance in 2014. This is when Dollar bulls began to take-over on the presumption that the Fed would a. shift further away from stimulus and b. start looking at rate hikes. This was also coupled with an oncoming ECB stimulus program, and this led to an aggressive top-side run that lasted all the way into 2015. The U.S. Dollar gained a whopping 27.2% from the May 2014 low up to the March 2015 high.

U.S. Dollar via ‘DXY’ Weekly: Currency Markets Don’t Wait Around, 27.2% from May 2014-March 2015

U.S. Dollar Weekly Chart

Chart prepared by James Stanley

The next 20 months saw the bulk of USD price action remain within a range. Prices bounced between 93.00 and 100.00 all the way into November of 2016, and this is when another significant driver availed itself as the world ushered in the ‘Trump Trade’. The Dollar extended up to a fresh 14-year high, and that held all the way into the New Year, at which point sellers started to take-over. And, that lasted for pretty much the entirety of 2017 as price action in DXY moved-lower within a bearish channel.

U.S. Dollar via ‘DXY’ Daily: 2017 Down-Trend Retraces 50% of 2014-2017 Major Move

U.S. Dollar Daily Chart

Chart prepared by James Stanley

As we moved into September, the U.S. Dollar finally found some element of support. This showed-up around the 50% retracement of that bigger-picture, major move that started all the way back in 2014. At this point, we could technically call 2017 a pullback in the larger overall trend that’s showed in the Greenback, and this opens the door for recovery possibilities as we move into a New Year.

The big question, at this point, is whether we’re going to soon see USD bulls starting to show-up. We’ve had a semblance of strength starting to show from that September low but, as of yet, Dollar strength hasn’t really taken-off with much prominence. Resistance has built in DXY around the 94.08-94.30 level. We’ve been following this zone for a few months now, and after a quick break-above following the ECB’s extension of QE price action fell back-below and we’re still seeing resistance show off of this zone.

This zone came into play this morning around Non-Farm Payrolls. Price action in DXY was trickling-higher leading up to the release, and shortly after the print prices moved-up to kiss-off of resistance before starting to fall-lower. At this point, the U.S. Dollar remains bearish on an intermediate-term basis.

U.S. Dollar via ‘DXY’ Daily: Resistance Remains 94.08-94.30

U.S. Dollar Daily Chart

Chart prepared by James Stanley

For next week: Look for a break above this zone of resistance for bullish plays. If we do see this, we can hypothesize that we’re seeing an element of short-cover ahead of year-end, and this could possibly lead to something more in 2018. But – if we’re unable to take-out that resistance, there is little reason to get excited for such a theme.

EUR/USD

The ECB just made a rather large announcement, so little is expected here. But, as has become usual, attention and focus will likely remain on ECB President Mario Draghi for any potential clues that may show towards policy leanings for 2018. It’s unlikely that Mr. Draghi will have much by way of new information for us, but since that last ECB rate decision we have seen a couple of really strong European data prints; namely the red-hot German GDP report in mid-November that helped to propel EUR/USD above a key zone of support that runs from 1.1685-1.1736.

This is another area that’s come into play this morning, as the pullback in EUR/USD has run-into the top-side of this zone. Thus far, that support has held as six consecutive hourly bars have seen some form of bullish reaction here.

EUR/USD remains as one of the more attractive ways to look to play a continuation USD-weakness. This would be partially defined by that 2014 theme in the U.S. Dollar, with traders expecting continued strength in the Euro-zone in anticipation of an eventual stimulus exit followed by higher rates.

EUR/USD Daily: Prices Pull Back to Key Support Zone 1.1685-1.1736

EUR/USD Daily Chart Euro

Chart prepared by James Stanley

GBP/USD

The British Pound has a few drivers other than the Bank of England at the moment, and this largely revolves around ongoing Brexit discussions. As a clarity has started to show a bit more, bulls have started to push prices-higher in many GBP-pairs. Some of those moves have been rather sharp of recent, indicating an increase in volatility after a two-month batch of messy, sideways price action.

Given that potential for higher levels of volatility around the fluid situation of Brexit, traders should try to be a bit more selective with taking on exposure here. We had looked at a key support level just a few days ago at 1.3320, and the reaction there was fairly strong as prices made a 200 pips incline over the following 24 hours. But, just as we’d seen in September and again in late-November, bulls were unable to hold gains above 1.3500 as prices pulled back.

For next week – there is a trend-line that’s held the bulk of this year’s lows in GBP/USD, and this can become an interesting area of support to investigate. If we do see support above this trend-line, the door can remain open for top-side plays.

GBP/USD Daily Chart Pound Sterling

Chart prepared by James Stanley

--- Written by James Stanley, Strategist for DailyFX.com

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Preview for November US NFP and Outlook for Key USD Pairs

News events, market reactions, and macro trends.

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Talking Points:

- Ahead of the US jobs data today, rates markets are pricing in over an 80% chance of a Fed rate hike in December.

- Expectations for the headline NFP figure are so low because of the impact of Hurricanes Harvey and Irma on the southeastern United States.

- Retail trader sentiment continues to shift in a way that suggest USD-pairs may still turn higher.

Upcoming Webinars for Week of December 3 to 8, 2017

Today at 8:15 EST/12:15 GMT: Live Event Coverage: US NFP (NOV)

See the full DailyFX Webinar Calendar for other upcoming strategy sessions

The US Dollar (via DXY Index) is trading back near its highest level in two weeks ahead of the the November US Nonfarm Payrolls report this morning. Price action has started to turn more bullish for the DXY Index, holding above its daily 8-, 13-, and 21-EMAs; however, both MACD and Stochastics have just started to turn higher, and are nestled comfortably in bearish/negative territory.

Current expectations for today's data remain are modest, even after better than expected ADP and ISM Services figures earlier in the week, with the unemployment rate expected to hold at 4.1%, and the headline jobs figure to come in at +196K. Wage growth is due in around +2.7% y/y. Using a 10-year rolling model, the ADP report and the ISM Services report can account for 89% of the changes in the NFP figure (R^2 = 0.89). In sum, these proximal trackers of the US labor market correspond with pace of jobs growth between +180K to +210K.

Overall, as long as the headline in today's jobs report comes in above +75K to +125K, the jobs data will be good enough to keep the economy on track to maintain the unemployment rate (U3) at 4.1% through the end of 2018. The Atlanta Fed Jobs Calculator shows that the US economy needs to add +110K jobs for the next 12-months to maintain the unemployment rate at 4.1%.

From this point of view, the US Dollar's bullish posture should remain intact heading into next week. Yet given the fact that the labor market isn't necessarily being watched closely as the decision trigger for the next rate hike, today's data may have a limited impact.

Certainly, no change are Fed rate hike expectations is expected. Coming into today, as they have been since October 26, Fed funds are pricing in a 100% chance of a rate hike next week. What hasn't been reflected thus far is what a downgrade in inflation expectations might bring.

Accordingly, in the event that the November US Nonfarm Payrolls report turns out better for the US Dollar, we see it as an opportunity to 'sell the rally' into the FOMC meeting on Wednesday.

See the above video for technical considerations in the DXY Index, EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF, Gold, and US yields.

Read more: US Assets Taking Divergent Paths: Stocks Look Healthy, the Dollar Doesn’t

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

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Pound Soars on Brexit Deal Hopes, US Dollar May Rise on Wages Data

Fundamental analysis, economic and market themes

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Talking Points:

The British Pound outperformed in Asia Pacific trade, building on yesterday’s gains inspired by seemingly brighter prospects for a Brexit deal. Official reports now say that Prime Minister Theresa May will travel to Brussels to meet with European Commission President Jean-Claude Juncker and top EU Brexit negotiator Michel Barnier today.

This allegedly follows a last-minute deal on the fate of the EU/UK border that will soon bisect the island of Ireland. The boundary was all but negligible when both Northern Ireland – a part of the UK – and the independent Republic of Ireland were both EU member states. Failure to secure agreement on this score brought down an almost-there Brexit accord earlier this week.

The Japanese Yen traded broadly lower as Asia Pacific stocks followed Wall Street higher, sapping demand for the standby anti-risk currency. The Swiss Franc also fell in what might have reflected its frequent role as regional Europe haven asset, with demand ebbing amid hopes for a Brexit breakthrough. The New Zealand Dollar turned higher, retracing some of yesterday’s outsized losses.

US labor market data enters the spotlight later in the day. Analysts expect a 195k nonfarm payrolls increase in November, marking a bit of a slowdown from the 261k added in October. The jobless rate is seen holding steady at 4.1 percent, matching a 17-year low. These headline figures seem unlikely to mean much for the US Dollar however considering a rate hike is almost fully priced in for this month’s FOMC meeting.

Average hourly earnings data may see a response however. The on-year growth rate is expected to hit 2.7 percent after sliding to a nine-month low of 2.4 percent last month. A brisk rebound in wage inflation might bolster the likelihood of a steeper rate hike cycle in 2018, even before any fiscal stimulus like tax cuts and infrastructure spending are accounted for. That may send the greenback upward.

What is the #1 mistake that traders make and how can you fix it? Find out here!

Asia Session

Pound Soars on Brexit Deal Hopes, US Dollar May Rise on Wages Data

European Session

Pound Soars on Brexit Deal Hopes, US Dollar May Rise on Wages Data

** All times listed in GMT. See the full DailyFX economic calendar here.

--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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